Can Meta carry the "AI monetization" banner that Microsoft failed to lift?

According to the financial news app Zhitong Caijing, after Google (GOOGL.US) and Microsoft (MSFT.US) failed to meet market expectations in their financial reports, investors in Meta Platforms (META.US) are hoping that the company will deliver a good performance to convince Wall Street that the massive spending in the field of artificial intelligence is worthwhile.

Wall Street is skeptical about how much money tech companies are spending on artificial intelligence and when they will start to see returns in terms of growth and profitability. In April this year, Meta raised its spending guidance to a level higher than market expectations, which has upset investors. Microsoft's stock price fell in pre-market trading on Wednesday after the company announced a slowdown in growth in its cloud computing division and indicated that capital expenditures will increase again in the next fiscal year.

Denny Fish, who manages the $7.2 billion Janus Henderson Global Technology and Innovation Fund, said, "The key question is whether Meta will increase capital expenditures. The demand environment is quite good, revenue trends are strong, and the valuation is still reasonable. However, it was sold off in the last quarter when everything except capital expenditures was normal, indicating how concerned investors are about this."

Meta is set to release its financial results after the U.S. stock market closes on Wednesday, showing some growth driven by artificial intelligence as the technology helps improve the advertising targeting of its social media products. It has also added new artificial intelligence features to WhatsApp, including an AI assistant that can help businesses connect with customers, answer questions, and sell products and services through chat.

But investors' patience with Meta may not be as strong as with other tech giants. In 2022, Meta stuck to its metaverse strategy and invested billions of dollars in an unpopular virtual reality vision, leading to two sharp drops in its stock price after financial reports were released. The company turned the tide in 2023, announcing an efficiency year marked by significant cost reductions and pleasing Wall Street with a $50 billion buyback and its first quarterly dividend in January this year.

The stock has risen 31% year-to-date, outperforming peers, partly due to Meta's relatively low valuation. Meta's forward P/E ratio is around 21 times, much lower than the Nasdaq 100 index's P/E ratio of 25 times. Nevertheless, due to broader sector rotation in the overall market, the stock has recently followed the sector lower, and underperformance in spending expectations is likely to continue the selling pressure. Options data shows that the implied one-day volatility for the stock after earnings is around 8.8%.

Analysts expect Meta's capital expenditures this quarter to reach $9.5 billion, a year-on-year increase of about 50%, with full-year capital expenditures expected to be close to $38 billion. Earnings per share for the quarter are expected to grow by 59%, with revenue increasing by around 20% Among the "Big Seven" tech giants that have already announced their performance, the recent stock price performance has highlighted investors' attention to capital expenditures and the necessity of ultimately exceeding expectations. Google's stock price fell last week because the company invested more resources in artificial intelligence, leading to expenses higher than analysts' expectations. Microsoft's stock price fell in pre-market trading on Wednesday as its Azure division's growth fell short of expectations.

Equally important is the area of expenditure that investors will focus on. Bank of America analyst Justin Post wrote in a report that cost reductions in Meta's augmented reality and virtual reality projects could "greatly boost" investor sentiment, even if the saved funds are redirected to artificial intelligence spending.

"While investors are constructive on artificial intelligence investment spending and opportunities, we believe investors are not supportive of spending on Reality Labs," Post wrote.

In fact, Meta CEO Zuckerberg also acknowledged concerns about spending in a recent interview.

He said, "It's very likely that many companies are now overbuilding, and when you look back, you will think, 'Oh, we may have spent tens of billions more than we needed.'" Nevertheless, he pointed out that overspending is reasonable, "because the downside of falling behind is that you will be at a disadvantage in the most important technologies in the next 10 to 15 years."